The ultimate contrarian’s bets for 2014

The case for buying what everyone else hates

Pariah is a super-exclusive, super-elite (and completely hypothetical) fund which operates on a simple strategy. “We invest in the stuff everyone hates, and we avoid the stuff everyone else loves,” explains one of the managing partners, who was speaking on condition of anonymity from the fund’s headquarters, in Dick Cheney’s old secret undisclosed location.

This year, says the partner, they are finding easy pickings.

There are three sectors that all stock market investors seem to hate, he says.

The Philadelphia Gold & Silving Mining index
XAU, -2.63%
dipped below 80 shortly before Christmas, down 65% from the all-time peak of 230 seen in April, 2011. (It has since ticked up slightly to about 87, still down about 62% from the peak). At current levels the index of gold mining stocks has massively underperformed the price of gold itself, and represent gold mining stocks are effectively a very cheap bet on the gold price.

Gold mining companies overspent and overinvested when the gold price was booming. But now that gold has plunged they are scaling back. Peter Bennett, a veteran investment manager at Walker Crips Group in London, has an old rule: Always buy a durable asset class once it has fallen by about two-thirds from its peak. Over a decent period—usually a few years—you will make good money most of the time.

Investors also hate the broader commodities and natural resources sectors, he says. “There’s a lot to like here because there’s so much that everyone hates,” says the partner. “Corn just had the worst year in at least fifty years. Fund managers hate commodities and energy stocks. They have one of the lowest exposures to energy since records began.”

In the event they’ve picked an investment in the SPDRs S&P Global Natural Resource stocks exchange-traded fund
GNR, -0.14%
to represent a basket of the equities across the industry.

Meanwhile it is steering well clear of the most popular sectors, such as technology stocks and banks.

Pariah is also making some big bets on a regional view. In a nutshell, it loves emerging markets and hates everywhere else — because all the other money managers have taken the opposite view.

“Emerging markets were the only major global stock group to lose ground last year,” says the source. The MSCI Emerging Markets index lost about 2% in 2013 even when counting reinvested dividends, the Brazil, Russia, India and China “BRIC” index lost 3% and the index of Latin American stocks plunged 13%.

This, in a year when developed markets boomed.

No wonder professional money managers around the world now tell Bank of America Merrill Lynch that emerging markets make them want to spit.

A year ago, when emerging markets were more expensive, professional money managers loved them. Now they are cheaper, and the same managers hate them. Those money managers now love Europe, the U.S. and Japan — three regions that left them cool a year ago.

“We’re long emerging markets,” says the source at Pariah. Top picks include Brazil, which lost 16% (in U.S. dollars) last year, and Turkey, which lost 25%.

“Everybody hates bonds,” they say. With economic growth picking up around the world, and the Federal Reserve starting to “taper” its bond-buying program, all the world and its dog is expecting bond prices to keep falling and bond interest rates, which move in the opposite direction to prices, to rise.

According to Bank of America Merrill Lynch, a net 64% of money managers are holding fewer bonds in their portfolio than their benchmarks would suggest — a massively negative position. It is one of the most bearish stances money managers have taken in a decade, says the investment bank.

Of course, during that decade, bonds turned out to be very good investments. Who knew?

Pariah Capital isn’t just betting on long-term U.S. Treasury bonds, either. It also likes municipal bonds, which everyone has fled because of Detroit-inspired headlines about bankruptcies, and emerging market sovereign bonds, which no one wants anymore because they combine two of the things money managers hate most — emerging markets and bonds — in the same unit.

“The whole point about a hedge fund is to charge 2% of the assets and 20% of any profits and do as little work as possible,” says the partner. “Most hedge fund managers screw that up by working 20 hours a day so they can look macho and have a stroke. But it’s stupid. Statistically, the more stock-picking and trading you do the more you will drive up costs and the worse your performance. We’re making these big bets now and then we won’t trade again until the end of the year. We’ll be on the ski slopes by Saturday.”

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